The third business news identifies and assesses the inflation issue happened in Taiwan.

It
is reported that the consumer price index(CPI) soared to 106.46 in October, a rise of 0.66%
compared with September. The advancement of CPI is mainly due to the happening of supply
shock, imported and tax-push inflation.

It is reported that Typhoon Megi hits Taiwan in the previous month. The crops were
damaged and thus supply of agricultural products drops tremendously. This leads to the shortage
of crops and triggered supply shock inflation. Furthermore, tax-push inflation happened due to
the increment in commodity tax that imposed on motor vehicles. These taxes are charged on
producers and they have no choice but to pass the burden of tax onto consumers. As a result, CPI
increases 0.56% compared with October 2009(Earth Times, 2010).

Moreover, fluctuations of exchange rates also create inflation problem. According to the
Directorate-General of Budget, Accounting and Statistics (DGBAS), weakening US dollar
increase the price of international raw materials(Yang, 2010). Higher oil prices pushed up
domestic fuel prices and transportation costs. This leads to imported inflation and consequently
firms have to raise their selling price in order to maintain their profit margin.

All the three causes increase the cost of production and forced the producers to lower
down their production. This resulted in the leftward shift of aggregate supply curve from AS 1 to
AS2. Hence, there is a shortage in goods available in the market and the general price level
increase from P1 to P2, which resulting in cost-push inflation.

General Price Level

AS2

P2
AS1
P1

AD
Real Output
Q2 YF/Q1

Diagram 1 – Cost-Push Inflation